re: #229 Charles

Monetary policy is not a sexy topic. Whoever sitting next to you on a plane is yapping on in your ear and you can’t stand to make conversation? Start talking about monetary policy, and I guarantee it will shut them up. Want to get out of a lousy date? It will work for that too. But monetary policy is very important and unfortunately, it is understood even more poorly by the general public than evolution, or other basic scientific concepts are.

I am not coming out in the defense of the “gold standard” per se, but of free banking in general. There is no world-central-bank, no world-treasury, yet the U.S. dollar has naturally arisen as a vehicle currency, not by UN or world-government fiat, but out of natural economic dynamics that push market participants toward the most desirable asset. Likewise, if the U.S. or any other country operated under a free banking system (that is, if the government stopped printing paper money and voided the legal-tender status of existing paper currency), asset-based currencies would emerge in the market to fulfill money’s vital functions of means of exchange, unit of account, and store of value. There would be diversification and specialization (different asset-backed currencies dominating different markets) but gold would likely emerge as a top player. The government wouldn’t sanctify or enforce its role in the economy; the market would.

Most people harbor some very obscene misconceptions regarding asset-backed currencies (otherwise known as hard money). They see it as retrograde, primitive, obstructive to economic growth, impractical to conduct transactions with, but those are regrettable myths. Free banking is still banking. People would not be carrying around gold bullions or bushels of wheat for transactions, but rather privately-issued bank notes redeemable in the fungible asset/commodity backing the currency. Electronic transfers would continue to be the norm, modernization in banking practices would continue unattenuated. But the tangible assets backing such currency would act as self-regulating control valves on the financial sector, and would prevent or, at any rate, strongly discourage, the formation of asset bubbles. Such self-regulatory qualities of “hard money” arise out of the stable relationship they impose on interest rates, price levels, and economic calculation. Fiat money is less stable, and easily bubbles up from collective market hysteria or the Fed’s (often ill-advised) manipulations. When your currency is backed by real assets instead of government fiat or popular opinion/trust, which can waver like the wind, it is much more difficult for an economic system, especially a highly complex one like ours, to depart from reality. The asset backing serves as a reality check, and a gravitating force toward reality.